(Reuters) - As Detroit prepares to discuss with creditors how to avoid bankruptcy, Standard and Poor's Ratings Services on Wednesday lowered the city's rating by four notches to CCC minus.
The downgrade from B, which affects both general obligation bonds and pension obligation certificates, is based on recent announcements from the city's emergency financial manager "that Detroit may take steps to adjust payments to bondholders," said Standard & Poor's credit analyst Jane Hudson Ridley in a statement.
The outlook is negative, reflecting expectations that within a year further downgrade are possible. A rating of C is reserved for entities that have actually filed for bankruptcy, while D ratings are for actual defaults.
"Should Detroit move to restructure its debt with principal reductions or other changes that negatively affect the full or timely payment to bondholders" or in any other deal under which investors will get less than originally promised "we would view this as a selective default," the rating agency said.
Kevyn Orr, a bankruptcy lawyer who was appointed as Detroit's emergency financial manager in March, is scheduled to meet with the city's creditors on Friday. According to media reports Orr may propose heavy "haircuts" to bondholders.
The story of Detroit's decline is decades old: Its tax revenue and population have shrunk and labor costs have remained out of whack. Motown could become the U.S. largest municipal bankruptcy surpassing by far the $4.2 billion of Jefferson County in Alabama.
S&P listed several options that Detroit is currently considering to adjust the funded debt obligation to its cash profile, ranging from a reschedule of the amortization to cuts into the debt principal.
"We expect conversations with bondholders and creditors concerning payments to be ongoing," the rating agency said.
Earlier this week, Orr said at a public meeting that the city has a 50/50 chance of filing for bankruptcy.
Friday's meeting is expected ahead of a June 15 payment of roughly $34 million that the city said it intends to make. "We are current on all the city's debt obligations and intend to remain so," said Bill Nowling, Orr spokesman, in e-mailed comments.
"But, as we have consistently said, the emergency manager and his team are examining all options available that will allow the city to meet the needs of its 707,000 residents while satisfying its obligations to creditors" he added.
In May, Moody's, which rates Detroit's general obligations Caa1 with a negative outlook, said that the city's bondholders face a growing chance of default or bankruptcy.
(Reporting by Tiziana Barghini; Editing by Carol Bishopric and Lisa Shumaker)
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